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Surplus leaves state leaders happy but concerned

Minnesota State Economist Tom Stinson says on Thursday that a good outlook for the state budget must include warnings that an economic downturn could change the state's prospects. Watching is State Budget Director Margaret Kelly. Photo by Don Davis/State Capitol Bureau

ST. PAUL -- The revelation of an $876 million Minnesota budget surplus includes a dark side.

Gov. Mark Dayton showed the two sides by calling Thursday's announcement "terrific news," moments later adding that it is "no time to celebrate."

"We're not out of the fiscal woods by any means," he said.

The takeaway for an average Minnesotan is that no one should expect a return to the old days of higher state spending.

For the time being, the projected surplus will stay in the bank, where the state economist said it should remain. However, politicians who control the purse strings would not commit to whether it would be spent or saved.

The surplus was a shock to most around the Capitol after government observers predicted a deficit of up to $1 billion.

The projected surplus is the first since 2007 and follows a series of deficits that included a $5 billion hole that the Republican-controlled Legislature and Democrat Dayton did not plug until after a 20-day July government shutdown.

While there were more smiles in the Capitol Thursday than usual, the good news came with plenty of warnings. For one, Thursday's "budget forecast" is just an early preview of a figure due in late February that state leaders will use if they make any budget changes in the legislative session that begins Jan. 24.

"I will not recommend any adjustments ... until after next February's forecast," Dayton told reporters.

House Speaker Kurt Zellers, R-Maple Grove, said that it is premature for Republicans to say if they would use the surplus for anything, such as business tax cuts they hold dear.

State Economist Tom Stinson said he thinks the best use of the surplus is to leave it alone, essentially sitting in the bank.

Current law requires the surplus to be used to refill state reserve and cash-flow accounts. It would take an agreement between Dayton and the Legislature to do otherwise.

Circumstances could change by February to turn Thursday's good news into a sour note. So state leader issued warnings along with the optimistic news:

-- A $1.3 billion deficit is expected in two years.

-- The Minnesota economy could take a turn for the worse if the European economy stumbles.

-- The good news depends, in part, on continuation of a federal tax cut established in the President George W. Bush years.

Thursday's better news was credited in part to lower spending than planned on health-care programs.

Human Services Commissioner Lucinda Jesson said fewer people than planned received state-funded health services, and more cost-effective ways of doing business saved $308 million.

"We are starting to bend the cost curve on the fastest-growing part of the state budget, the health and human services budget, and we are doing so at a time when more and more people are turning to public programs," Jesson said.

State leaders also now expect lower spending in other programs in the next two years than they did when the legislative session ended. Plus, state revenues were $348 million more than planned last year.

Part of the improvement in health-care spending came because state officials have had some time to monitor new programs and do a better job of predicting the need for future funding.

Senate Majority Leader Amy Koch, R-Buffalo, shot down one way the surplus could be used: to fund a proposed Vikings football stadium. Koch wasted no time saying that the money was not available for a stadium, but Dayton said the surplus would at least give him more time to work on the stadium issue instead of dealing with a deficit.

Democrats and several special interest groups said the surplus came at the expense of their programs.

"There is no doubt that the state budget was balanced on the backs of Minnesota property taxpayers," said Worthington Mayor Alan Oberloh, president of the Coalition of Greater Minnesota Cities. "State policy makers should take a deep breath, put the money in the bank, and wait until the February forecast to determine if this surplus is real."

If it is real, the mayor said, state leaders should use the money to relieve property tax increases.

Unions suggested using the money to create jobs, much like Dayton said a public works bill, and even a stadium-building measure, would send thousands of Minnesotans back to work.

The budget forecast assumes a $775 million public works financing bill.

A smiling Commissioner Jim Schowalter of Minnesota Management and Budget announced the surplus: "Certainly, it is a good day."

But he and Stinson provided plenty of warnings that the projected surplus could dry up.

"These forecasts are not guarantees," Stinson said.

Nationally and internationally, "I think the situation is getting a little dire," he added, with some predicting a European recession will affect the United States. "There is a real possibility this could go bad."

Stinson said Minnesota's economy is doing better than the national numbers because it has a highly educated and productive workforce. The state is expected to continue outperforming the national economy, Stinson added.

Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.